Sumer Project

A
Project report
On
Goal Based
Financial Planning
n partial fulfilment of the requirements of the Summer

nternship of
Masters of Management Studies
conducted by
University of Mumbai
through
Rizvi nstitute of Management Studies & Research
Under the guidance of

Prof. Ali Arshad Shaikh
Submitted by
Yusuf Hotelwala
M.M.S
Batch: 2009 ± 2011
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his is to certify that Mr. Yusuf Hotelwala, student of Rizvi nstitute of Management
Studies and Research, M.M.S bearing Roll No. 118 and specializing in Finance has
successfully completed the project titled
èGoal Based Financial Planning´
under the guidance of Prof. Ali Arshad Shaikh in partial fulfilment of the requirement of
Masters of Management Studies by University of Mumbai for the academic year 2009 -
2011.
__________________
Prof. Ali Arshad Shaikh
Project Guide
__________________ __________________
Prof. Umar Farooq Dr. Kalim Khan
Academic Coordinator Director
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t may take just formality to deference and hallucinate net of heightened words, to express
gratitude in favour of a teacher, or an institute but the fact is somewhat different that the
feelings of an obliged heart cannot be put on papers. Always there remains a lot to say but
want of words too.
would like to express my sincere gratitude and thanks to my project guide Prof. Ali
Arshad Shaikh for giving me the valuable guidance & helping me throughout this project
& for his special attention to me.
would also like to thank our Director General Dr. C.G.D¶ Lima and Director Dr. Kalim
Khan for giving me extensive support in completion of the project & all the people who
helped & assisted me wherever needed their help by giving their precious time &
valuable suggestions to me.
Last but not the least would like to give my sincere regards to all my friends & college
staff for their co-operation towards completion of my project.
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his project, under the guidance of Prof. Ali Arshad Shaikh was undertaken as part of my
summer internship project wherein the allocated topic is ³Goal Based Financial
Planning´.
Goal Based financial planning is a process through which an individual can chart a
roadmap to meet goals and needs in life. Simply put, the intention is to take necessary
steps to ensure that the individual is equipped to accomplish what he has set out to
achieve and is prepared to deal with contingencies as well.
And yes, the importance of financial planning (especially in the present scenario) cannot
be overstated. Among others, two factors are responsible for the same i.e. inflation and
changing lifestyles.
Financial planning can ensure that one is equipped to deal with the impact of inflation,
especially in phases like retirement when expenses continue but income streams dry up.
Financial planning has a role to play in helping individuals both upgrade and maintain
their lifestyle as well.
Finally, there are contingencies like medical emergencies or unplanned expenditures that
an individual might have to cope with. Sound financial planning can enable him to easily
mitigate such situations, without straining his finances.
n this project we look at the definition of goal based financial planning along with the
steps involved in. hen have highlighted the importance of Asset Allocation. Finally
there are case studies given of 10 different individuals along with their goals and needs
and how to go about doing financial planning for each of the situation.
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re all have dreams! For buying a new car, that dream house, getting their children
married in style, or simply retiring early. All these are also significant financial decisions.
Astute long-term planning may make life financially secure, while inadequate or
misguided planning could turn it awry. he process of meeting your life's goals, through
prudent management of finances is what is often referred to as `financial planning'.
Financial planning provides direction and meaning to your financial decisions. t allows
you to understand how each financial decision can affect other areas of your finances. For
example, buying a particular investment product might delay your retirement
significantly. By viewing each financial decision as part of a whole, you can consider its
short- and long-term effects on your life goals. You can also adapt more easily to changes
and feel more secure that your goals are on track.
Financial planning covers the various facets of individual's financial needs, which
include:
G - Financial Position:
his area is concerned with understanding the personal resources available by examining
net worth and household cash flow. Net worth is a person's balance sheet, calculated by
adding up all assets under that person's control, minus all liabilities of the household, at
one point in time. Household cash flow totals up all the expected sources of income
within a year, minus all expected expenses within the same year. From this analysis, the
financial planner can determine to what degree and in what time the personal goals can be
accomplished.
2 - dequate Protection:
he analysis of how to protect a household from unforeseen risks. hese risks can be
divided into liability, property, death, disability, health and long term care. Some of these
risks may be self-insurable, while most will require the purchase of an insurance contract.
Determining how much insurance to get, at the most cost effective terms requires
knowledge of the market for personal insurance. Business owners, professionals, athletes
and entertainers require specialized insurance professionals to adequately protect
themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment
products may be a critical piece of the overall investment planning.
3 - ax Planning:
ypically the income tax is the single largest expense in a household. Managing taxes is
not a question of if you will pay taxes, but when and how much. Government gives many
incentives in the form of tax deductions and credits, which can be used to reduce the
lifetime tax burden. Most modern governments use a progressive tax. ypically, as your
income grows, you pay a higher marginal rate of tax. Understanding how to take
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advantage of the myriad tax breaks when planning your personal finances can make a
significant impact upon your success.
4 - nvestment and ccumulation Goals:

Planning how to accumulate enough money to acquire items with a high price is what
most people consider to be financial planning. he major reasons to accumulate assets is
for the following: a - purchasing a house b - purchasing a car c - starting a business d -
paying for education expenses e - accumulating money for retirement, to generate a
stream of income to cover lifestyle expenses.
Achieving these goals requires projecting what they will cost, and when you need to
withdraw funds. A major risk to the household in achieving their accumulation goal is the
rate of price increases over time, or inflation. Using net present value calculators, the
financial planner will suggest a combination of asset earmarking and regular savings to be
invested in a variety of investments. n order to overcome the rate of inflation, the
investment portfolio has to get a higher rate of return, which typically will subject the
portfolio to a number of risks. Managing these portfolio risks is most often accomplished
using asset allocation, which seeks to diversify investment risk and opportunity. his
asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash
and alternative investments. he allocation should also take into consideration the
personal risk profile of every investor, since risk attitudes vary from person to person.
5 - etirement Planning:
Retirement planning is the process of understanding how much it costs to live at
retirement and coming up with a plan to distribute assets to meet any income shortfall.
6 - state Planning:
nvolves planning for the disposition of your asset when you die. ypically, there is a tax
due to the state or federal government at your death. Avoiding these taxes means that
more of your assets will be distributed to your heirs. You can leave your assets to family,
friends or charitable groups.
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: stablish your goals.
hink long and hard about what you want to accomplish in life, your current status and
future potential of your earnings
: Gather data.
Start by collecting all your bank and brokerage statements, insurance policies, real-estate
documents, and maybe even your most recent tax returns. List your assets and liabilities.
You will also need to gather records of all your sources of income and expenses, and
anything else you can think of that is related to your finances.
: nalyse the data.
At this stage, you will create a personal net worth statement and a statement of annual
cash flows. You will also analyse the adequacy of your estate plan and insurance
coverage. As the picture develops, specific shortfalls or excesses will come into focus,
along with areas you need to change.
: ^reate a plan.
Now you're ready to lay the roadmap that will help you accomplish your goals, given
your risk tolerance and time frames. Your plan may call for immediate changes, such as
diversifying your investments, shifting your asset allocation, consolidating accounts,
optimising your insurance coverage, or drafting wills and other estate planning
documents. Your plan may also call for longer-term actions such as altering your
spending and saving habits over time.
: mplement your plan.
Here's where the rubber meets the road; implementing your plan may involve opening
certain types of accounts or purchasing certain types of securities, policies, funds or other
financial and investment-related products. Suitability and performance hold the key here,
of course. But remember, you can potentially boost the overall, long-term performance of
your investments by keeping costs and expenses as low as possible. Also, take advantage
of available tax-free and/or tax-deferred accounts, in addition to your regular taxable
brokerage account.
: onitor your plan.
his involves keeping an eye on the performance of your investments, periodically

rebalancing/churning your portfolio. n the absence of a major event in your life, once or
twice a year should do it.
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2.G ^GG P
f the future always went according to plan, financial planning would be a one-time
exercise. But life throws a few curves now and then. So, when you monitor your plan,
revisit the goals you set in Step 1 as well, for two reasons:
ou want to measure your progress towards your goals and objectives to make sure you
are on track.
nce in a while, you may find that your goals need to be modified.
2.2 G P F
he financial planning process is not exactly rocket science. However, given the specialty
areas of income-tax, succession planning, retirement planning, insurance and investment
planning not to mention how each of these areas can impact the others ² it might pay to
enlist some professional assistance, at least to get started
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F^ P G
Goal Based financial Planning means saving for specific goals. Following are the steps to
be followed:
hink of major events in your life which would have a significant financial
implication, and for which you would like to save.
Find out the cost of achieving these goals today.
Determine how far away these goals are from today (in years).
Determine the cost of achieving these goals at the target timeusing an approximate
but conservative rate of inflation.
Determine the after-tax rate of return you can achieve when you invest today.

Arrive at the per-year and per-month investment necessary for each goal, if
needed.
Start investing today, specifically for these goals!
3.G S:
his can be best explained using an example. So let's say you are a 27 year old working
Man, falling in the highest tax bracket.
Note: n the example, have used ndian Rupees as the currency. f you are from a
country other than ndia, just replace the currency and amounts with those relevant for
you, and that would work - the basic principles of Goal Based nvesting remain
universally true for everyone!
Step G:
etermine Goals
Although there would be many financially significant events for which you would like to
save, for this example, let's say you decide you have only two goals.
1. Buy an apartment
2. Buy a car
Sr. o. Goal

1 Buy an apartment
2 Buy a car
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Step 2:
etermine ûrrent ôst
How much do these goals cost today?
n the area where you intend to purchase your 2 bedroom apartment, it costs around Rs.
30,00,000 today.
he car you are planning to buy costs around Rs. 5,00,000 today.
Sr. o. Goal ôst ow

1 Buy an apartment 30,00,000
2 Buy a car 5,00,000
Step 3:
etermine time frame
Now is the time to decide when you want to achieve these goals.
You decide that you would like to stay in your own apartment when you are 50. his
means that you have 23 years to achieve that goal.
You would like to buy the car in about 4 years from now.
Sr. o. Goal ôst ow ears From ow

1 Buy an apartment 30,00,000 23
2 Buy a car 5,00,000 4
Step 4:
etermine the cost of achieving the goals then
Now, this is a tricky part, because you would need to assume a rate of inflation. You
would need to increasethe cost of your goals using the inflation rate, because the cost of
achieving your goals would keep increasing every year due to inflation.
Assuming the rate of inflation is difficult, because you would need to define it for the life
of your goals - 23 years for goal 1 - which is a very long time!
You know that the current rate of inflation is around 3.25%. But you also know that this
is around the historic lows, which means that it may not remain 3.25% for the entire 23-
year period you are considering.
Since the average inflation for the past few years has been around 5%, you assume that
the inflation would average 5% during this 23-year period too.
Since the purchase of car is just 4 years away, you assume a rate of inflation which is
closer to the current inflation rate. Also, you don't expect the cost of cars to rise too much
due to the increasing competition. So, the rate of inflation for this goal would be 3.25%.
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Having decided the rate of inflation, you now need to find out the cost of achieving your
goals at their target dates. For this, you need to use the compound interest rate equation:
Amount = Principal * [{1 + ( Rate / 100 ) } ^ Years ]
For us,
Principal = Cost today
Rate = Assumed rate of inflation
Years = Years till the achievement of the goals
Using this formula, we arrive at the following figures:
Sr. o. Goal ôst ow ears From ow ôst hen
1 Buy an apartment 30,00,000 23 9214571
2 Buy a car 5,00,000 4 568238
am sure this would prove to be an eye-opener, as you realize how inflation wrecks
havoc on your targets, especially the long-term ones!
hat's why believe that compounding can be the most powerful friend when used wisely
in the form of starting investments at a young age, but at the same time, can be the most
devastating enemy in the form of inflation for long-term goals.
Step 5:
etermine the after-tax rate of return for investments made today
his is another assumption you need to make - how much your investments would return
if you invest today? Also, it is important to assume an after-tax rate of return, because that
is what you get in your hands for spending!
he rate of return would depend largely on the type of investment.
Since the goal of buying an apartment is 23 years away, you can very safely invest in
stocks, as stocks give the best rate of return in the long term. Historically, stocks have
returned 15% - 20% returns over the long term, so you assume that you would be able to
achieve around 18%. Since there is no long term capital gains tax on stocks, your post-tax
return would also be 18%.
he goal of buying a car is only 4 years away. his is a very short time to invest in stocks
for a goal - short term volatility in the stock markets could eat into your returns, and you
may not be able to get enough to buy a car. So, you decide to invest in bank FDs which
give around 9.5% per year. Since you fall in the top tax bracket, and pay 30% tax, your
post tax return from the FDs would be:
9.5% - (30% of 9.5%) = 6.65%
Sr. o. Goal ôst ow ears From ôst hen ate of
ow eturn
1 Buy an apartment 30,00,000 23 9214571 18%
2 Buy a car 5,00,000 4 568238 6.65%
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Step 6:
etermine the per-year and per-month investments needed
Using the figures that we have till now, you can calculate the lump-sum amount that you
can invest now to save enough for your goals. For this, you need to discount the "Cost
hen" using the "Rate of Return". n simple terms, it means:
How much money you need today, so that it would grow into an amount equal to "Cost
hen", if invested at a rate equal to "Rate of Return".
he formula for this is a variation of the compound interest formula:
Principal = Amount / [{1 + ( Rate / 100 ) } ^ Years ]
For us,
Principal = Lump-sum amount to be invested now
Amount = Cost of achieving the goal at the target time
Rate = Assumed rate of return
Years = Years till the achievement of the goals
For our goals, we arrive at the following figures:
Sr. Goal ôst ow ears ôst ate of mt eeded

o. (s.) From ow hen eturn ow
1 Buy an 30,00,000 23 9214571 18% 204734
apartment
2 Buy a 5,00,000 4 568238 6.65% 439225
car
Shocked by the amount needed to be invested now, for the goal of buying an apartment?
But it is true - and this is the power of compounding. Since you are making a very long
term investment, compounding would do most of the hard-work for you!
Also note that the "Amount needed now" is less than the cost of the goals today, because
the assumed rate of return is higher than the assumed inflation rate. Since for goal 1, the
difference is very high, the amount needed now is significantly lower than the cost of the
goal today. For goal 2, the difference is less, and so the amount needed now is only
slightly lower than the cost of the goal today.
he "Amount Needed Now" figure gives you the lump-sum amount that you can invest
now to save enough for your goals. his would be possible if you have a one-time surplus
- like a yearly bonus. f you have such a surplus, go ahead and invest it - and you won't
need to invest every year or every month for the goal. But please be careful - would
suggest that even if you do have the amount needed, if you are investing in the stock
market, make staggered investments so that you can benefit from cost averaging.
But most people would not have such a large amount at their disposal, and for them, the
best way is to invest periodically. So, lets go ahead and find out how much you need to
invest every year for each goal.
For doing this, we would use the concept of an Annuity, and we would do it using a
function called FV (Future Value) in MS Excel. t looks something like this:
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Here is a table indicating the yearly and monthly savings needed if the goal of buying the
house is 5, 10, 15, 20, 25 and 30 years away. Again, we assume the rate of inflation to be
5%.
Sr. o. ôst ears ôst ate of mt mt mt eeded
ow From hen eturn eeded eeded Per onth
ow ow Per ear
1 3000000 5 3828845 18 1673623 535188 44599
2 3000000 10 4886684 18 933672 207756 17313
3 3000000 15 6236785 18 520872 102301 8525
4 3000000 20 7959893 18 290581 54286 4524
5 3000000 25 10159065 18 162108 29653 2471
6 3000000 30 12965827 18 90436 16393 1366
f the goal is 30 years away, you need to set aside a very modest sum of Rs. 16,393 per
year. But if the goal is 10 years away, you have to set aside a hefty sum of Rs. 2,07,756
every year.
his example illustrates that the earlier you start saving, the better is the effect of
compounding, and therefore, the lesser is the money that you need to invest. ime has a
disproportionate positive effect on your returns.
Note:
he calculations that you would do depend on two very important assumptions:
Vc Expected rate of inflation

Vc Expected rate of return
Please note that both these need to be assumed as accurately as possible, as even a little
change in these can vastly impact the amount needed to be invested every month,
especially for long term goals.
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G P
he Pyramids of Egypt have stood for around 5,000 years. he reason why they have
lasted so long is the basic structure of each layer being built on the strong foundation of a
broader, solid layer beneath. hat is exactly the way to build your wealth so it too will
stand the test of time.
Your wealth pyramid has seven layers. And just like a real pyramid they must be added in
the right order. magine if you tried to build a pyramid upside down, with the small layer
at the bottom and each layer above getting progressively bigger. How long would that
pyramid stand? t is just as disastrous if you try building you wealth pyramid in the wrong
order.
Let's look at the layers, starting from the strong foundation layer and working our way up
to the pinnacle.
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his is the most important layer because it is the foundation for your wealth. f you don't
get your head right then anything else you build will topple over.
he wealth success mindset consists of your beliefs, your habitual thoughts and your
habitual actions. t is important that these three attributes are inline with the achieving and
maintaining wealth.
2: PPP S S

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Luck plays very little role in the creation of wealth. You may have some good or bad luck
from time to time but over the long term you accumulate exactly what you deserve based
on your mindset and your application of knowledge and skills.
f you don't have the knowledge or skills to create wealth then the first investment you
should be making is in your own wealth education. f you think getting knowledge is
expensive then try investing without it and you will soon find out just how expensive
ignorance can be.
3: S
^ P
here are so many ways to make (or lose) money. here is the stock market and its
derivatives, the property market; residential, commercial and development and then there
are many different forms of business. here is the trading approach and the investing
approach and there are many different approaches within these two main categories.
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n short there is a huge variety of approaches to wealth creation and each has its
advantages and disadvantages. n order to find your way through this maze and reach
your goal you need a well thought out action plan. Your plan should include which
opportunities you will focus on and how you intent to capitalize on them.
4: G
S G
he first responsibility of any investor or business person is to not lose money. hat is
why risk management is on the layer before profit.
here is a lot of difference between risk management and risk avoidance. Every
investment and every business contains an element of risk. f you practice risk avoidance
then you will do nothing. Risk management is the skill of identifying potential risk and
then taking actions to minimize the potential for loss.
5: PS ^S F
he reason that cash flow comes before equity is that it reduces your risk of going broke.
Equity increases your net worth but you need cash flow to live on. So many people build
property portfolios of high equity growth, low yield property and then find that they can't
sustain the loan payments.
f you have cash flow producing investments first then they can subsidize your high
equity growth, negative cash flow investment.
6: ^ SG

Cash flow gives you money to live on today but equity gives you long term security and
money to live on tomorrow. f you keep your equity growth investments and positive cash
flow investment in the right balance then you can have the best of both worlds.
7: B F S

he most sensible objective of any wealth building plan is to eventually provide you with
your desired lifestyle whether or not you choose to continue working. Most wealthy
people do keep working because they enjoy it but they always have the choice to stop if
and when they ever want to. f you have built your wealth pyramid correctly then you will
arrive at this point.
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Everyone has financial goals they want to achieve, whether it is accumulating a target
amount of money before retirement, ensuring that a pension fund can provide promised
incomes to retirees, or, in a different context, achieving an increase in corporate cash
flow. nevitably, we do not have unlimited resources available to achieve these goals. re
often face not only financial constraints, but also shortages of information, time, and
cognitive capacity. n many cases, we also face additional constraints on how we can
employ available resources to achieve our goals (for example, limits to the maximum
amount of funds that can be invested in one area, or the maximum acceptable probability
of a result below some threshold).
Broadly, these are all asset allocation problems. re solve them every day using a variety
of methodologies. Many of these are no quantitative, such as dividing resources equally
between options, using a rule of thumb that has worked in the past, or copying what
others are doing. However, in cases where the stakes are high, the allocation problem is
complicated, and/or our choice has to be justified to others, we often employ quantitative
methodologies to help us identify, understand, and explain the potential consequences of
different decision options. his article considers a typical asset allocation problem: how
to allocate one¶s financial assets across a range of investment options in order to achieve
a long-term goal, subject to a set of constraints.
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5.2 S SS ^?
Analyst and other ³experts´ invariably spout jargon. erms like valuation, diversification,
and asset allocation are thrown at us from every angle. Little wonder that investors are
invariably confused. But not all these things are as incredibly complex as they sound.
One such term we often hear is asset allocation. hough it appears intimidating, in actual
fact, the meaning is quite straightforward. Asset allocation is all about putting our eggs in
different baskets. t¶s a kind of insurance or protection, should one of the investments go
bad. f the stock market crashes, the non-stock holdings can help bail us out. Or if real
estate plunges, we will thank God for the PPF account. n actual fact, whether we realise
it or not, we are already allocating the assets ± as most of us have our wealth divided into
different assets ± gold, real estate, stocks, bank account, etc. he question is whether we
are doing so consciously and strategically, or simply in a random or haphazard manner.
he two phrases, ³asset allocation´ and ³diversification´ are often used interchangeably.
But not many know that there is a subtle difference between the two terms. his is
because they have similar objectives: o minimise risk and provide exposure to differing
growth opportunities within an investment portfolio. Diversification is often likened to
the old adage; ³Don¶t put all the eggs in one basket.´ By doing this, we can help prevent
losing it all on one poor choice-just as all the eggs would break if the dropped the basket.
A diversified portfolio help protect against large losses because, typically, if some
securities crash, other may perform well.
Asset allocation is similar to diversification, but involves some amount of strategy. he
cornerstone of this is allocation of assets over different asset classes. n a diversified
stock portfolio, we not only have a stock portfolio, but a bond portfolio, a cash equivalent
portfolio, and maybe some other types of assets as well. he combination of multiple
asset classes offers the growth potential of stocks, combined with regular income and
relative stability of bonds and the liquidity and security of cash. Most of us spend
sleepless nights trying to figure out which stocks to buy or sell, or whether to own mutual
funds or derivatives. hese are no doubt real concerns, but much of the tension could be
minimized by some prior planning. And it is this planning that is called asset allocation.
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Asset allocation is actually a relatively new concept. ill about twenty or thirty years
ago, it was believed that specific stock selection, or market timing, or timing the decision
to move from stocks to bonds were the most important determinants of investment
success. But today, though most of us still try to live on timing and selection of
individual securities, his investment professionals have come to recognize the importance
of asset allocation.
Several studies in the recent past have shown that asset allocation is the single greatest
determinant of investment performance. Depending on whose research we look at, we
will find that the distribution of our money amongst types of asset.
5.3 SS ^?
f stocks are the best long-term investments, then why don¶t investors just stock to
stocks?
hough the first article of this primer (rhat is asset allocation?) lays down the basic
reasons for asset allocation, many assume that this is only theoretical. he common
belief is that asset allocation is meant only retired or conservative investors. After all,
market-savvy punters like us don¶t need all these bonds and other such boring
investments. re know how to play the stock markets so well and make so much money
from our capital, that we don¶t need all this asset allocation stuff. f this is what we
believe, then we couldn¶t be more wrong. f actual fact, the reasons for the recent
disillusionment with asset allocation has been the incredible, decade long bull market in
the US. n ndia, too, the unabated (and phenomenal) rise in CE stocks has led investors
to shun all other options. Obviously, investors believe they can achieve better returns by
concentrating their investments rather than diversifying them. hrough this strategy may
have proved very successful in the late nineties, the year 2000 should have woken we up
to the reality. Ultimately, over-dependence on one asset class ignores the risks that are
being taken, while considering only the Returns. Asset allocation may or may not help
increase the overall returns, but it will definitely help lower the risks. One should realise
that the recent extra-ordinary stock-market performances are just the extra-ordinary! No
one knows what the future holds in store, and asset allocation is one simply one measure
that tries to insulate on from various possibilities. he first thing to remember is that ³he
c
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future may really be different!´ Despite the fact that keep saying that past performance is
no guarantee of future returns, do we really believe it ± and base our investments on that?
rhen we are making money had over fist on high-flying stocks like nfosys and Zee, we
tend to believe that our stock-picking skills will provide good returns forever. But in our
heart of hearts we all know it is impossible to be certain of any future market
performance, and the recent crash should have brought around even the most die-hard
punters. he selection of any investment is preceded, either implicitly or explicitly, by an
asset allocation decision. Asset allocation is therefore said to be the most fundamental of
investment decisions. As we saw in the first article of this primer, the asset allocation
decision accounts for around 90% of the variation in returns over time. Despite this, until
recently, asset allocation was an ad hoc exercise. nvestors were advised to allocate
anywhere from 100% in bonds based on a cursory classification by age or income.
However, in recent times, much research has gone into the subject and the concept has
become much more scientific than in the past. he principles underlying asset allocation
are actually quite simple. Firstly, history shows that not all classes of assets move in the
same direction at the same time. n one year, large-cap stocks may rise, while bonds fall.
n another year small-caps may surge along with real estate. History also tells us that
some asset classes are far more volatile than others. For instance, the yearly variance in
the stock markets can be quite drastic, while the bank account does not change regardless
of what happens in the outside world.
deally, if we or could predict which asset classes would do best in any specific time
period, we would have no need for asset allocation. n such a situation (assuming we
were operating in ndian markets), we would have moved into stocks in late 1993, exited
in late 1994 and bough bonds, entered into stocks in late 1996 and then sold out again
in early 2000. But then how many of us are psychic?
Or if we were sure that we would not need money for the next thirty years, it may make
sense to buy only stocks and stick with them ± given that this asset class has historically
provided the best returns. Again, how many of us can be sure that we won¶t need money
a few years down the line, and this need won¶t arise when the markets are in the grip of
bears?
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Asset allocation is ideal for all us mortals who aren¶t psychic, and who will need to use
their savings at some point in their lifetime. By following a policy of balancing the types
of assets we own between stocks, bonds, and cash, we trade ³the best´ returns we¶d get if
we timed the markets perfectly for predictability and peace of mind. Strangely enough,
most people tend to abandon asset allocation just when they need most ± like at the peak
of a bull-run or at the bottom. At the height of a ³teji´ we should be looking at non-stock
assets more seriously, while at the bottom, we tend to go overboard on bonds, when we
should be looking more closely at stocks. ypically a strong recent trend makes us want
to concentrate our holdings in that asset class, while logic and long term history tell us
that this is when we should actually look closer at other asset classes.
n conclusion, rather than trying to figure out when a particular asset class has peaked or
bottomed, it makes sense for investors to formulate a broad strategy for allocation that
can be fine tuned from time to time. his is the only way to ensure that we minimize the
risks, while taking advantage of growth possibilities.
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5.4
FF SS ^ SS S ± S /S
re know asset allocation and present a (hopefully, convincing) case for using this
technique. re also spoke loosely about ³asset classes´. Essentially, the allocation
process needs to first categorise different assets into broad classes with similar
characteristics. n the investment world, there are two parameters that are of paramount
importance. he first is the return that one gets from a particular investment, and the
second is the risk that one takes to achieve that return. Also, it is known that there is a
direct relationship between the two. Greater is the returns, the greater is the risk. t is
very difficult to foresee the future risks or returns that a particular investment will have,
so we tend to use historical data for classification purposes.
Conservative investments, such as cash or bank accounts offer minimal risk, and
essentially seek to preserve existing capital and offer minimal risk. Moderate-risk
investments include highly debt instruments (such as company fixed deposits or bonds
issued by corporate) as well as bonds with shorter maturities. Stocks typically offer
greater growth possibilities-as well as greater risk potential.
But it is not simple. rithin each of these individual asset classes lie further segments,
such as value and growth stocks, corporate and government bonds, bank deposits and
PPF. here are also other assets like gold or real estate that may not fit into the three
commonly accepted categories. Also, certain types of assets like cyclical stocks are often
treated as separate assets classes because they have different historical performance
characteristics from other stocks.
rhile talking of real estate, though these investments have been very popular in the
ndian context, their lack of liquidity and high unit value makes them intrinsically
unsuitable as investments for most of us. For the purpose of this discussion, we will
restrict ourselves to the three basic asset classes comprised of financial securities. Once
the basic principles are understood, an investor can choose to define further classes as per
his needs and perceptions.
A Profile of the hree Basic Asset Classes each of these three-asset classes offers
measurably different tradeoffs between risk and return, and each benefits the portfolio in
a different way.
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×c âsh quivalents: money market funds, reasury Bills, bank deposits, post office
savings and the like ± provide for low risk and the preservation of principal but
generally do not provide returns high enough to outpace inflation.
×c Bonds (fixed-income investment): represent loans to a business or government,

provide for preservation of principal and a fixed rate of return when held to maturity.
rhile most bonds generate current income, they offer limited potential for increasing
returns. Examples of these in ndia are company fixed deposits, CC bonds and the
like.
×c Stocks (equities): represent shares (or part ownership) of a company. rhile stocks
can and do experience significant volatility, historically, they have provided the best
record of long term growth of principal.
c
2c
have compiled a broad comparison of the risk versus return equation for various
investment opportunities for the ndian investor, in the table below:-
Risk-Return Comparison of various nvestment Avenues
ype of nvestments Historical Returns Risk Level

×c Cash Equivalent :
Liquid Funds (money 7-8% Low
market mutual funds)
Bank Fixed Deposits 7-10% Low
Post Office, NSC (Govt.) 10-12% Low
Govt. Securities 8.5-12% Low
PF/PPF/Pension 11-12% Low
×c Bonds:
Company FD 10-14% Low
Bonds 10-15% Low
ncome Mutual Funds 10-14% Low
×c Equity:
Equity Mutual Funds 18-22% High
Equities 18-22% High
ote G:
n ndia, though PPF and similar accounts appear to have higher returns for lower risk
(because the government guarantees them), this is illusory. hese instruments are very
illiquid, and given that liquidity is an important measure of risk (we should get the money
when we need it) ± some would argue that these instruments should be classified as
bonds.
ote 2:
At some point of time, company FDs offered much higher returns (similar to equities),
and as was found later, bore a huge risk as most of the issuers defaulted. By now, most of
we have a pretty good idea of what the different asset classes are, and their historical risk-
return profiles. Now we can get down to the business of allocating the assets among
these classes.
c
0c
5.5 P S F SS ^
×c Fixed Vs. Flexible Asset Allocation
×c Strategic Asset Allocation
×c actical Asset Allocation
G. Fixed s. Flexible sset llocation:
×c A fixed ratio of asset allocation means that balance is maintained by liquidating a

part of the position in the asset class with higher return and reinvesting in the
other assets with lower return.
×c his is not what the investor normally does. hey tend to increase their equity
position when equity prices tend to climb up and vice versa.
×c But, this approach is more disciplined and lets investor to book profits in rising
markets and increase holdings in falling, markets.
×c A flexible ratio of assets allocation means not doing rebalancing and letting the
profits run.
×c As stocks and bonds will give different returns over time, initial asset allocation
will change, generally in favour of equity portion as its return would be higher
than bond portion.
×c he Distribution- oriented investor will find his initial ratio change in favour of
equities much more than the accumulation- oriented investor.
×c Rs.200 invested equally in stocks and bonds with returns being 10% and 7% at the
end of 10 yrs for accumulating investor will result in 57/43 ratio and at the end of
20 yrs 63/37 ratio.
×c But for distribution receiving investor after 10 yrs ratio will be 66/34 and after 20
yrs ratio will be 79/21 ratio.
2. Strategic sset llocation
×c t recommends adjusting the percentages for each group of investors after taking
into account of their age, financial circumstances and objectives.
×c t classifies investors in terms of their lifecycle phases.
c
c
×c During the Accumulation phase, an investor would be building assets by periodic
investments of capital and reinvestments of all dividends received.
×c During the Distribution phase, he will stop adding assets and start receiving
dividends as income.
×c Distribution phase :-
| c Older investor - 50/50 (equity/ debt)
| c Younger investor - 60/40 (equity/ debt)
×c Accumulation phase :-
| c Older investor - 70/30 (equity/ debt)
| c Younger investor - 80/20 (equity/ debt)
×c n other words, younger investors can be more aggressive and let the magic of
compounding work for them.
×c rhile older investor take a more conservative approach.
×c Similarly investors in the Accumulation phase can take greater risk than those
who need income and are in their Distribution phase.
×c For example, a 30 year old investor makes 70/30 asset allocation and at age 50 let
him balance it out and so on.
3. actical sset llocation
×c Despite the difficulty of forecasting people do it and fund managers themselves

change their asset allocation percentages in the light of their views on the future
movements in asset prices.
×c hey seek extra returns by taking bets on the relative valuation of different assets.
×c For example an investor may invest in the small company more than the large
company shares or prefer value stocks over growth stocks, further investor may
change the equity/debt mix itself in favour of where he expects a greater returns.
×c hese tactical changes in asset allocation within the overall percentages holding or
in the strategic ratio itself may yield extra returns if the bet is right.
×c But clearly there is no guarantee.
cc
CLEN CASE
SUDES
ON
GOAL BASED
FNANCAL
PLANNNG
c
^S G
Name : Mr. Shabbir Patawala
Residence : Reay Road, Mumbai
Requirements :
am 44 years and working in a private company. My net earnings amount to Rs 42,000 a

month. My wife, 36, gets rental income of Rs 25,000 a month. She is a homemaker.
My monthly household expense is Rs 15,000. have monthly commitments of Rs 8,254

towards car loan; Rs 10,000 for home loan EM and Rs 4,000 towards chit investment.
save Rs 8,000 in post office recurring deposit. have taken a family-floater health policy
for Rs 4 lakh and am paying a premium of Rs 9,300 an annum.
have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my

insurance policies. have five insurance policies and my annual premium outgo is Rs
90,000 and the sum insured is Rs 10 lakh. My savings in mutual fund is Rs 71,000. had
given Rs 3 lakh to a friend as a loan and am likely to get the money back next month.
Please suggest a saving plan taking these factors into consideration.
My son is in Class V. need to provide Rs 20 lakh for his engineering and Rs 30 lakh for
post graduation expenses. After retirement should have a monthly pension equal to my
current expenses of Rs 15,000. Please tell me how much should save monthly to meet
my pension requirement? My family health history is good and may live up to 80 years.
was investing in MF through systematic investment during 2007 and 2008. stopped all
my investment during the market crash. Please suggest a few schemes. s it the right time
to start SPs in equity MFs and buy gold EFs? My MF portfolio consists of HDFC op
200, HDFC Equity, HDFC Capital Builder, HDFC Prudence, Birla Sun Life nternational
and HDFC nfrastructure.
s my life cover of Rs 10 lakh adequate or do need to increase the cover?
-c Shabbir Patawala (Mumbai)
c
c
^
S:
You have not mentioned when you get the rental income. Even if you are receiving it
only for the past few years, there is big disconnect between your income and investment.
For wealth creation, an individual needs proper financial planning, no matter what the
income level or the stage of life.
Financial planning can go a long way in helping you manage expenses and meet your
goals. t is mandatory for people with limited income. But, in practice, this segment
ignores such planning.
As some of your goals have less than 10 years to play out, it is high time that you have a
disciplined and planned approach.
ducation:
As the graduation needs are spread across four years, if you save Rs 12,400 for next 84
months and if the investment earns a return of 10 per cent you can reach the target of Rs
15 lakh. For the shortfall of Rs 5 lakh you ought to invest the Rs 3 lakh that your friend
returns in an plan that gives 10 per cent. he outgo for post graduation starts only in
2020, so you can take higher risk in your investments and target an annualised return of
12 per cent. f you can achieve such a return you need to save Rs 13,000 every month for
next 120 months.
etirement:
Retirement planning is often overlooked. Most individuals tend to give attention to it

once all emotional goals are accomplished. By that time it would be too late to take risky
bets on investments. By trying to save for a shorter duration monthly commitment will be
stretched and, in most cases, reaching the target would become arduous.
n your case, the annual requirement of Rs 1.8 lakh, if inflated at 6 per cent, would mean
that at the start of 60 years you would need Rs 4.5 lakh. By the time you turn 80, your
annual pension need would be Rs 14.6 lakh. he savings in insurance is not adequate to
meet the requirement.
Your rental income has the potential to take care of about two-thirds of the retirement
needs, provided the income grows to match inflation. For the remaining one-third, you
need to save Rs 26,000 monthly from the age of 54 for the subsequent four years. he
investment should earn a return of at least 8 per cent to reach Rs 15 lakh. Deploy this
along Jeevan Shree maturity proceeds of Rs 10 lakh for your pension needs and it should
earn 2 per cent above the inflation to meet your needs till the age of 80 years.
As a backup, your maturity proceeds of other insurance plans need to be redeployed in an

investment with small exposure to equity. As you have not mentioned about your
provident fund contribution and gratuity, we have not factored them.
cc
nvestment:
t commonly observed that investors start SPs in mutual funds when markets are rising,
and discontinue their monthly commitment when equities are in a corrective phase. his
strategy goes against long-term savings strategy and the concept of SPs.
Do ensure that all your savings are linked to goals, but do keep track of your investments
and take corrective steps, if the investments start underperforming consistently for 4-6
quarters. he fresh SPs can be started with the existing portfolio barring Birla Sun Life
nternational Fund.
As your investment universe of MF is small, you can stick with domestic schemes as
overseas investing is fraught with uncertainties and cannot be easily monitored; in any
case, ndia is one of the fastest growing markets. hematic funds such as HDFC
nfrastructure needs constant monitoring and profit booking, if there is any abnormal rise.
f you are a conservative investor, stick to diversified funds. Our picks are DSPBR
Equity, HDFC op 200 and DFC Primier Equity.
You will be short of funds with the current investment plan. Hence you can discontinue
the post office recurring deposit and continue chit investments up to maturity.
he plan suggested to you is based on your current income; do review the strategy once in
six to 12 months.
nsurance:
Based on your current salary and goals, (we suggest) it is suggested that you to buy a
pure-term insurance for Rs 80 lakh for next 15years and your annual premium would be
Rs 19,300. Regarding your health insurance, the current sum insured of Rs 4 lakh appears
reasonable. But once your income rises, you can consider buying a top-up health
insurance for Rs 3 lakh.
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rhen your family moves from a double income structure to a single income regime you
should have a plan in place to keep tab of unnecessary expenses. rith reduced income,
risk appetite will undergo some changes despite your age. Going by your asset allocation
pattern, you are over weight on real estate even after counting out your new house. So this
is the right time to balance your asset allocation.
As you have said that you have moderate risk profile it may be worth considering asset
allocation pattern of 50:20:20:10 in equity (direct and mutual fund together), debt, real
estate and gold. Besides, as your wife is not going to be employed anymore, avoid
utilising her terminal benefits to retire any of the outstanding loans. As any income
arising on account of her investment will be short of marginal tax slab of Rs 1.9 lakh
return on her investment will not be under threat even if the direct tax code is
implemented in its current form.
re have assumed an inflation of 6.5 per cent and return on investment as 12 per cent
during the accumulation period. After retirement, the return calculation is pegged at 2 per
cent over and above inflation.
aughter's education:
Considering inflation of 6.5 per cent, in six years you may need Rs 7 lakh to fulfil this
task. As you already saving Rs 18,000 per annum towards education in a ULP product
hoping it would provide a market return of 12 per cent, the maturity value is likely to be
around Rs 3.5 lakh. o meet the shortfall of Rs 3.5 lakh you ought to save Rs 3,300 for
the next 72 months and it should earn a return of 12 per cent per annum.
arriage:
he present value of Rs 15 lakh is likely to be Rs 33 lakh in 14 year. Your surplus of Rs

5,000 per month will not support any monthly savings. t is better to use the sale proceed
of the old house to achieve this goal. For instance if you deploy Rs 10 lakh from the sale
of your house for next 10 years at 12 per cent and re-deploy the maturity proceed at 8 per
cent for next four years in a low volatile, low-risk investment, your maturity proceed will
be Rs 42 lakh. After meeting your requirement you will have a surplus of Rs 8 lakh that
can be used for any shortfall in retirement corpus or for other purposes.
etirement:
he monthly expenses of Rs 15,000 or Rs 1.8 lakh is inflated at 8.5 per cent (inflation at
6.5 per cent and increasing standard of living at 2 per cent) at the start of your retirement
at 60, your annual requirement will be Rs 10 lakh. f you have Rs 1.95 crore at the start of
your retirement and if it earns an inflation adjusted return of 2 per cent, this corpus will
suffice till your 85 {+t} {+h} year (life expectancy stated by you).
c
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o achieve this corpus, you ought to invest the sale proceeds of house, your current
investments and your wife's settlement money totalling to Rs 27 lakh (after earmarking
one lakh as emergency fund) at 12 per cent return for 17 years at 8 per cent for the last
four years. f you are not able to meet this target, your current and future accumulation of
provident fund can cushion against any such shortfall.
âpital gains:
he old house you bought at Rs 8 lakh in 1999, adjusted for cost of inflation index, will
stand at Rs 13 lakh. f you happen to sell the house at Rs 18 lakh, your capital gains will
be Rs 5 lakh.
You have the option of paying capital gains tax of Rs 1 lakh or you can park the capital
gains in any of the approved bonds (for our calculation we presumed that you are paying
capital gains tax). Out of the sale proceeds of the house, Rs 2 lakh can be use do pay the
the outstanding in the home loan account.
ealth insurance:
he current policy may be inadequate. t is better to increase the amount to Rs 10 lakh.
o avoid unnecessary outgo of premium, buy top up health insurance for Rs 7 lakh.
erm insurance:
Your current surplus can take care most of your goals. he risks that are to be addressed
are your monthly expenses and other requirement. Hence, it may ideal to buy term
insurance for Rs 25 lakh and another Rs 20 lakh to protect your housing loan liability.
he annual outgo for both the insurance policies will be Rs 13,200 if you buy life
insurance online. he monthly surplus of Rs 1,700, after adjusting for the education goal,
can be used to buy health and term insurance.
c
1c
^S 3
will be retiring in 10 years. My family comprises my wife, father (72) and a son in Class
V. Our investments are spread across bank fixed deposits (48 per cent), corporate fixed
deposits (6 per cent), direct equity (13), Govt securities including PPF (18), debt mutual
funds (11) and the balance in the form of land. My investment is Rs 20 lakh in all these.
Anticipating changes in interest rates, all our deposits are invested in schemes of less than
one year. Mutual fund investment in equity is from debt (floating rate and short term)
through SP over 1-3 years.
re have two flats ± one self-occupied and the other let out. he let-out house has a home
loan liability of Rs 16 lakh. Seven years of the loan is left. About 70 per cent of the EM
is met through rental income; net of this our current EM outgo is Rs 30,000.
Our monthly expenses including school fees and EM is Rs 30,000. After meeting all our
expenses we have a monthly surplus of Rs 1 lakh.
Our current concerns are: For my son's education at today's cost would require Rs 25
lakh for a basic professional course combined with a good MBA. How much should
save on monthly basis to reach this goal? Our total investment is Rs 2.65 crore this
includes our investment in two residential flats and other assets of Rs 20 lakh. Do we
need further diversification across assets? re have a moderate risk profile. do not have
any employer sponsored pension. For my standard of living, an inflation adjusted income
of Rs 20,000 will be sufficient. Our health status is good and we expect a minimum life
expectancy of 75 years. Suggest investment avenues to build retirement corpus for the
next 10 years. re have two life insurance policies with sum assured of Rs 5.3 lakh
maturing in 2015 and 2026. As am covered by group health insurance provided by my
employer, have no separate medical insurance and do not intend to increase the
insurance cover for life and health.
-c Mr. Husain Shaikh
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Pension:
he present monthly requirement of Rs 20,000 or Rs 2.4 lakh per annum, inflated for 10
years at the rate 8 per cent (6 per cent assumed for inflation and 2 per cent accounted for
increase in standard of living) would mean that you would require an annual income of
Rs 5.2 lakh at the age of 60.
Considering your present state of health, we have presumed your life expectancy as 80
years rather than 75 years as stated by you.
f you have a corpus of Rs 1 crore at the start of your retirement, it will suffice for the
next 20 years provided you earn interest adjusted for inflation and standard of living.
o accumulate the pension fund you need to save Rs 48,000 for the next 120 months at a
return of 10.3 per cent. Alternatively if you plan to utilise the rental income as part of
pension needs, then monthly saving will come down by more than 50 per cent assuming
your rental income grows at a rate of 10 per cent for every block of five years. f you do
so, the monthly surplus will be close to Rs 40,000 after meeting the investment needs for
other goals. he same can be used judiciously to build an estate for your son.
For this investment you can have asset allocation mix of 50:40:10 in debt, equity and gold
in that order.
nsurance & F:
t is surprising to see such a large portfolio without a term insurance. Considering your
goals and liability you definitely need at least a decreasing term insurance for Rs 50 lakh.
Regarding the health insurance you may be covered under the group health insurance, but
once you retire you are exposed to the vagaries of health. Hence it's advisable to take
health insurance at least 4 years before retirement to cover any pre-existing disease.
Your investment in HDFC op 200 is a good choice. You can consider DSPBR Equity
Fund ahead of the HSBC Equity to build your MF portfolio. Both the Reliance Schemes
you have mentioned are performing well; you can continue your SP.
c
2c
^S 4
SUBHAJ RAY, a 35-year-old MNC executive, lives in Kolkata with his wife and 3-
year-old son. His annual income is around Rs 8 lakh, out of which, Rs 25,000 per month
goes towards household expenses. n addition, he is paying an EM of Rs 20,000. He has
invested extensively in equity mutual funds, public provident fund (PPF), bank fixed
deposits and small-saving instruments. He has purchased a child plan entailing a yearly
premium of Rs 40,000, apart from paying annual life insurance premiums amounting to
Rs 26,500. n addition, he is contributing to a pension plan using the sales proceeds of
stocks. His goal is to build a retirement corpus to maintain his current lifestyle.
^
S:
Mr Ray is well prepared as far as his basic financial planning is concerned ² he has
adequate health and life insurance cover, plus liquid cash balance, which can take care of
any emergency financial requirements.
etirement:
His current expenses amount to Rs 25,000 per month. t would be safe to assume that
over the next 20 years, living standards would go up and so would medical expenses and
other costs, for which, an income stream of Rs 40,000 p.m. in the next 20 years needs to
be ensured. his amounts to Rs 4,80,000 p.a. in current rupee terms, so this would mean
an annual requirement of around Rs 15,40,000 p.a. then (assuming 6% p.a.) in his 55th
year; life expectancy here is assumed to be 90. Assuming a 10% return on corpus, post
retirement and a 6% inflation rate, Mr Ray should be looking at a corpus of Rs
2,87,00,000 by the time he is 55 to suffice him till he is 90.
ûrrent nvestment Status:
Risk-free instruments: His investments in bank fixed deposits and small savings total to
Rs 16,50,000. he income from both these instruments is being used to build up an equity
corpus. he PPF corpus will be Rs 32 lakh 14 years hence, or in his 49th year. re
recommend this to be invested in monthly income plan yielding say, 9% CAGR returns
then for the next five years. his should create up to Rs 49,00,000.
rhile the LC Endowment Plan will take care of his child¶s needs along with the double
benefit plan, the Aviva Pension Plan can yield Rs 65,000 X 17 = Rs 13,56,000 at 10%
returns CAGR in May 2012. his corpus at 10% CAGR would grow to Rs 68,55,000 in
his 55th year.
f continued till the 55th year, his investments in mutual funds through SP of Rs 10,500
p.m, at a CAGR of 10% returns, would yield Rs 79,70,000. Based on his current financial
c
0c
investment status, his total corpus would grow to Rs 2,13,75,000, which means there is a
shortfall of approximately Rs 75,00,000.
herefore, the monthly surplus of Rs 5,000 could be further optimally utilised by
investing in equity mutual funds yielding 10%. his would create an additional corpus of
up to Rs 36,00,000 corpus in the 55th year.
Assuming the current situation, Mr Ray¶s ancestral property will continue to yield him
returns post retirement as well. Besides, the income from the house property currently
under construction should yield him a return in the next couple of years, which should be
adequately and systematically invested. All these should more than adequately take care
of his retirement nest.
sset llocation:
Currently, his asset allocation is 25:75 towards debt and equity, which is quite adequate,
considering his age and the size of the corpus. re recommend that future salary
increments could be deployed into a mix of SPs in hybrid MFs.
c
c
^S 5
HARUMA Ganesh, 27, and her husband, 31, are a typical upper middle-class ndian
couple, with remunerative jobs and relatively few family responsibilities. heir parents
are yet to retire and hence, their 2-month-old son is the only dependent. Out of the
combined annual income of around Rs 20 lakh, Rs 80,000 goes towards their expenses
every month. n addition to investments in mutual funds, PPF, fixed deposits, etc, each of
them owns two houses ² with the equated monthly installments (EM) being paid
currently. heir primary goals include arranging for adequate corpus for their son¶s
education when he turns 18 as well as their retirement. Charumati plans to retire at the
age of 45 while her husband plans to continue working till he turns 60.
^
S:
HE couple has taken the first step towards creating long-term wealth, i.e. realising that
they need to plan for the same. he current portfolio of assets is clearly tilted towards real
estate, as the family has invested in two houses ² one being their current residence. he
family also holds stock options, which will create significant wealth in the long term.
Apart from this, they also have started investing in mutual funds through SPs (Rs 28,000
per month) while Rs 1,84,000 is invested in pension plans and PPF, which will provide
safety to their portfolio.
Even though both of them are covered for mediclaim by their company, they would do
well to consider a family floater health cover ² at such a young age, the premium is
significantly lower.
After taking into account the current investments and premiums, they still manage to save
about Rs 4,00,000 per annum. his should first be utilised towards creating a corpus by
increasing monthly contributions by Rs 22,000, which will take their current SP
exposure to a healthy Rs 50,000 per month.
Assuming that the goal for the child¶s education when he turns 18 is to create for him a
fund valued at Rs 25 lakh in today¶s rupee terms, the family needs to invest Rs 1,20,000
every year in diversified funds, which will cumulatively yield 12% CAGR. hat should
provide them with a corpus of Rs 67,00,000 then ² providing for inflation @ 6% pa.
his apart, the other investments ² equity, mutual funds, PPF, pension plans and
insurance plans ² will grow into a sizeable corpus of more than Rs 4 crore in 18 years,
without considering the stock options, which are currently held. Even if we are to
consider an increased monthly expense rate of Rs 50,000 per month, and then adjust it for
inflation ² after the home loan EMs are paid off ² this corpus will adequately take care
of the expenses.
rith the increased savings, which are to be channelised into the child¶s education corpus
and the family retirement fund, they are very much on track to build sizeable wealth in
the long term. he family needs to ensure that the available surplus is put to immediate
c
c
use via investments as mentioned above and the same does not remain in their savings
account for long periods.
he recommended investment plan ² without considering the stock options ² should
give them a debt : equity asset allocation of 30:70, which we recommend be rebalanced
yearly. Also, it is recommended that additional savings be channelised into a recurring
deposit or debt plans which would go towards building a contingency fund.
c
c
^S 6
A Madhusudan, 44, lives with his wife and 2 children, aged 14 and 8, in Mumbai. n
addition to an annual salary of Rs. 10 lakhs, he earns Rs. 1.5 lakh of rental income. His
investments are skewed towards insurance policies ± endowment, money ± back as well
as ULPs. His monthly expenses include household expenses of Rs. 35,000 and EM
totalling Rs. 36,000 pertaining to 2 houses. His goal includes providing for his children¶s
education and his retirement. He plans to close his housing loan by 2015.
^
S:
Assumption: All incomes are net of tax
General bservation:
here is high dependence on insurance and real estate for investment. Considering his
goals, there is little allocation towards equities. deally, the rental income of Rs 12,500
per month could have been invested in equity funds.
Basic Financial Planning:
o take care of eventualities, we suggest keeping a fund of Rs 500,000. He is adequately

covered with his term, health, disability as well as home owner¶s insurance cover.
nvestment Planning:
For his age and financial goals, an asset allocation of 60% in equities is recommended.
Any capital amount received from insurance policies over the years could be reinvested in
equity instruments.
Goal Planning:
Buying home worth Rs 1 crore/prepayment of home loans ² Rs 30 lakh in 2015:

hese goals seem feasible only if there is an increase in income and he were to consider
selling one of the current properties in the next five years.
c
c
ducational Goal:
^hild G (inflation-adjusted s 20 lakh in 20G5)
he equity investment of Rs 300,000 would yield Rs 5,25,000 in 2015. he payments
from money-back policies, if invested in equities, returning 12% per year, should yield Rs
2,80,000. Post this, there would be a shortfall of Rs 12,00,000. f the entire amount is
required at one go (in the first year), he may have to opt for short-term personal or
education loan.
^hild 2 (inflation-adjusted s 28.5 lakh in 202G)
After providing for loan repayment of the first child, the survival benefits and payments
from money-back policies, if invested in equity MFs till 2021, should yield Rs 31 lakh.
he balance can be invested in equity.
etirement Planning:
n 2022, survival benefits of Rs 4.10 lakh are due. his coupled with Rs 1.5 lakh in the
earlier year can be reinvested in equity products. n 2023, the EM of Rs 9,628 will end;
this surplus could be directed to an equity SP for the next 24 months. hus, equity
holdings at retirement will stand at Rs 8,35,700 in 2025. He is looking at drawing Rs
40,000 a month. Considering rental incomeof Rs 12,500, he wants to provide to the extent
of Rs 27,500 per month. Assuming a life expectancy of 90 years, there is a shortfall
amounting to Rs 1.77 crore.
f he were to build this corpus through a plan which yields him 12%, he needs to
immediately put aside Rs 40,000 per month. Also, the loan with Rs 26,300 EM will
continue after his desired retirement age, which could be repaid through the equity corpus
of Rs 8,35,700.
c
c
^S 7
JAPRAKASH (35), who lives in Mumbai, is planning to help his artist wife Anuradha
set up a venture of exhibiting her paintings next year. his involves an investment of Rs 1
lakh. His other goals include prepaying his home and personal loans and increasing the
allocation towards his son¶s (aged 4) education when he turns 18. He earns Rs 12 lakh per
annum while the family¶s monthly expenses, excluding the EM, amount to Rs 22,000.
He has purchased two insurance policies ² a child plan and a pension plan, which entail
a yearly premium of Rs 12,000 and Rs 20,000, respectively. His EM outgo stands at
around Rs 35,500.
^
S:
rhile considering prepayment of debt, Jaiprakash needs to prioritise on repaying the

costlier personal loan. Also, his prepayments should not disturb existing periodic cash
outflows and future payment commitments.
Since Mr Jaiprakash seems to be the only earning member at present, he needs to put in
place the following essentials for his family:
Create an emergency liquid fund (of up to Rs 2 lakh) to take care of outflows due to
sickness/temporary loss of salary.
A term policy of around Rs 25 lakh to cover outstanding loans: his could cost
approximately Rs 7,000-8,000 a year, assuming no history of ill health. A family health
insurance policy.
Funding the new venture:
Anuradha¶s commendable decision of starting her venture needs to be backed with a

judicious view of the cash flow expected from her artistic endeavour. A µpainting¶ is an
expression of the artist, the sale of which is very much a product of the whims and fancies
of the connoisseur, as it is of the current state of the art market, hence it is difficult to
project cash flows. he couple needs to deliberate on the following carefully, particularly
since such a project involves a long gestation period, before the venture¶s
commencement: A) he various costs ² fixed as well as variable ² involved in opening
her gallery. hey should take into account the material costs, electricity, bills, rent,
transport, conveyance, etc. B) he cost of renting or buying a place or working out a deal
with gallery owners for the space.
c
1c
Goals:
His monthly surplus of Rs 7,000, (Rs 84,000 pa), makes it imperative for him to prioritise
goals. re would advise him to start building a wealth portfolio.
f they are able to raise the estimated capital expenditure of Rs 1 lakh through other
means (short-term borrowing from parents, relatives, etc), then Anuradha could
comfortably start off on her venture. However, we suggest that this should not be looked
at as a business activity that could generate additional income. An income earned out of
this venture should be considered a bonus, which could be used to clear the personal loan.
his would amount to nearly Rs 1.2 lakh, besides the EMs, if paid by December 2010.
Otherwise, we do not think it is feasible to prepay the loans in the current year.
re also suggest earmarking Rs 15,000 pa towards buying a term insurance policy and
health policy, while up to Rs 2,000 pm could be invested in liquid funds for the
emergency corpus. Another Rs 2,000 pm should be invested in equity mutual funds to
generate wealth ² the effects of compounding over a period of time could prove magical,
even with this seemingly-modest figure!
c
/c
^S 8
MUMBA resident Shankarkumar Suman, a 32-year-old bank employee, is keen to buy a
house and a car in the next couple of years. Out of his annual income of Rs 4.5 lakh, he
spends around Rs 18,000 per month, and has invested in several mutual funds and fixed
deposits. His long-term goals include providing for his son¶s education and also
retirement needs, to ensure that he and his wife are able to maintain their current lifestyle.
^
S:
Since Mr Suman is the only earning member with two dependents, including a one-
yearold infant, we feel that he needs to scale up his cover so that he is capable of meeting
at least 15 years¶ expenses. hat means a sum assured of at least Rs 25 lakh more. his
could cost Rs 6,500 p.a. He would also need to be covered for health insurance, which
would entail a yearly premium of Rs 6,000.
His savings bank balance and time deposit should serve as a cushion for any emergency
needs, should they arise. His current investments are skewed towards debt investments
returning fixed returns. His current asset allocation is almost 80% in debt, which needs to
be changed to 70% equity for his age, goals and long-term planning. He could look at
directing his investment in ELSS and bank deposits maturing in the coming months
towards equities to better returns.
Goal-riented Planning:
Since for the purchase of the car, down payments and instalments will be wholly-financed
by salary arrears and future incremental income, the impact on current financial flows
could be considered irrelevant till the time of completion of EM payments. However,
one needs to consider that a car entails additional expenditure such as fuel costs,
maintenance, servicing costs and insurance, which could amount to around 30-50% of
EM costs. Keeping his various goals in mind, he could consider looking at a cheaper car
range, which could take care of the ancillary expenses. Alternatively, he could defer
purchasing the car till a further improvement in income, if he thinks buying a house is
more important.
c
#c
Purchasing a ouse:
A house worth Rs 35 lakh will involve a down payment of nearly Rs 7 lakh and an EM
of Rs 20,000, for a 20-year tenure. Assuming that he opts to not buy the car and
considering the current surpluses, he would still be short of EM payments by
approximately Rs 5,000, three years hence. re suggest that this decision could be
deferred for another five years or until there is a marked improvement in salary. re have
assumed that he presently stays with his parents and there will be no saving on rent by
buying his own house.
^hild ducation Planning:
Assuming that he would need a corpus of Rs 25 lakh for his kid in his 18th year, he
should create an inflation-adjusted corpus of Rs 67.31 lakh in 17 years. Various
investments in MFs would materialise to Rs 11.55 lakh, 17 years hence or in the child¶s
18th year. Considering his current cash flows, he could take an education loan then.
etirement Planning:
Maintaining his current lifestyle means Rs 2.40 lakh p.a, which translates into Rs 13 lakh
p.a in his 60th year, after 29 years. Assuming a life span of 90 years, he needs to plan for
the next 30 years at 13 lakh p.a (Rs 1,08,000 p.m), adjusting for inflation. his means a
retirement corpus of close to Rs 2.26 crore when he is 60. His current investments would
yield a corpus of around Rs 1.79 crore, which means that currently there is a deficit of Rs
48 lakh. Surplus after the recommended Rs 3,500 SP in ELSS, is around Rs 3,500 p.m.
Out of this, Rs 3,000 can be invested in balanced fund SPs to yield Rs 48 lakh in 29
years at 8% p.a return.
ationalising between goals:
His current shortfall in retirement corpus needs to be revisited yearly and the plan
tweaked accordingly. f he feels that buying a house or providing for his child¶s education
constitute more pressing issues than planning for a comfortable retirement, he could
utilise a portion of retirement allocation towards these needs, as required. Shortfall in
retirement corpus, if any, could be met through means such as reverse mortgage in future.
c
2c
^S 9
FORMER government employee Manohar Vasudev, 51, has taken up employment with a
private firm in Mumbai. He and his wife are the two earning members in the family that
includes their two children and Mr Vasudev¶s mother. rith a consolidated annual income
of Rs 13.75 lakh and expenses of Rs 40,000 per month, the family is sitting on ample
liquidity. his apart, he has no loan outstanding and is assured of a pension stream. His
main goals now include boosting his retirement corpus and providing for his kids¶ higher
education.
^
S:
MR VASUDEV seems to be in a comfortable financial position, with adequate income

flows, no loan repayments and a pension stream to supplement his existing income.
Assuming that he plans to retire in the next nine years, he needs to make the most of his
income (besides pension) right now.
He has adequate liquid investments in savings bank account and FDs, and also has a
medical cover. rhat he may need to provide for is any enhanced medical expense of his
dependent mother, which can be made good from the bank FDs.
sset llocation:
he family¶s total investments amounting to Rs 13,50,000 is skewed towards debt (low to
no-risk) instruments. re feel that this ratio needs to be corrected so that equities account
for a minimum of 30% of his portfolio. Considering the age of the earning member, the
nature of investments and age to retirement, the corpus may seem insufficient. Similarly,
the insurance cover of just Rs 3,00,000 may seem inadequate. But keeping in mind the
regular income stream through government pension, children¶s low education cost, this
consideration may be discounted to a certain extent. Also, buying life insurance now
could prove to be expensive, due to Mr Vasudev¶s age.
nvestment Planning:
he family has an adequate, almost unutilised surplus of Rs 70,000 per month. hough
there is no pressing need, this could be utilised more judiciously to further augment the
wealth corpus. f he were to invest Rs 40,000 per month in equities, it would amount to a
principal of Rs 4,80,000 p.a or a corpus of Rs 69,62,000 over nine earning years,
assuming 10% CAGR. his would ensure a comfortable retired lifestyle. hese could be
broken up into a couple of blue-chip mutual fund SP investments.
c
0c
ax Planning:
He needs to invest an additional Rs 92,000 (approximately) to utilise the entire 80C limit.
Out of the remaining surplus of Rs 30,000, he could start a monthly ELSS SP of Rs
7,500 p.m. (to yield Rs 13,00,000 at the age of 60). More popular avenues like a 5-year
Bank FD product would return a taxable income of a maximum marginal rate (which
cannot beat inflation); starting a PPF account, which would fetch 8% tax-free return and a
15-year lock-in, which we feel will not favour him, considering his age profile.
ife¶s 80^ nvestment:
Mrs Vasudev could consider investing in a 6-year NSC, which returns 8% compounded
half-yearly (8.16% p.a). Around Rs 1,00,000 could be invested to create a corpus of Rs
12,98,000 at the time of retirement. hough the accrued interest is taxable, it qualifies for
deduction U/S 80C, thus offering attractive returns as PPF, without the lock-in of 15
years. One could also look at buying these instruments for their children, especially the
younger child aged 15, since they mature in 6 years.
c
c
^S G0
JAKSHANDaryanani, 26, is one of the two earning members in his family and actively
contributes to his family¶s monthly budget. he family¶s total annual income amounts to
Rs 5.8 lakh, out of which, Rs 42,000 per month goes towards expenses, including rent and
his younger brother¶s college fee. His aim is to buy a house in the next three years and
start saving to provide for his father¶s post-retirement years.
^
S:
As of now, there is little left at the end of the month to save or invest. herefore, while
careful spending is advisable, we would also recommend his brother to take an education
loan, which would help them save up to Rs 5,000 a month.
Goal riented Planning:
re would advise Jaikishan to defer the decision of buying a house for a few more years,
since arranging for the down payment may prove to be difficult. Even if he were to look
at funding the down payment, the repayment of the EM and the down payment would
not be feasible (even after considering savings of rentals of Rs 7,500 per month). Since he
is one of the two earning members, we would advise him to go in for a term insurance
policy for say five years (till his brother starts earning) with a sum assured of at least Rs
10 lakh. He should invest the monthly surplus of Rs 3,750, after providing for the cost of
annual insurance premium, in equity MFs. Assuming he initiates an SP for five years in
equity funds, it would work out to Rs 1,93,000 (principal of Rs 1,50,000) or Rs 5,12,000
in 10 years (principal of Rs 3,00,000) or Rs 18,98,000 in 20 years (Rs 6,00,000 principal).
CAGR is assumed to be 10%. hus, we advise him to initiate the investment habit right
away; since he has age on his side and can afford to take a greater risk. Once earnings are
enhanced, he could also start a PPF account, which would offer a tax free rate of 8%.
Father¶s etirement:
he amount saved on his brother¶s education could be invested for his father¶s retirement.
hough ideally, it should be invested in a debt fund (risk-free), the urgency in creating a
part of the kitty in a short time would require him to take some exposure to equity too.
re suggest a combination of monthly income plan (MP) and SPs, which have up to
15% exposure in equities (estimated CAGR of 9%). he amount of Rs 5,000 saved every
month for the next five years till retirement would amount to Rs 3,77,120. He could also
look at balanced funds. his amount needs to be monitored carefully for any changes in
long-term market conditions. re suggest that the amount required per month should be
withdrawn from this kitty. Any gratuity received from the current job could be invested in
a risk-free investment like FDs or 9% senior citizen bonds, where the interest is payable
quarterly.
cc
BB GP
BS
Personal Financial Planning

- By G. Victor Hallman, Jerry S. Rosenbloom
Ernst & Young's personal financial planning guide

- By Martin Nissenbaum, Ernst & Young, Barbara J. Raasch
BS S
Vc www.financialplan.about.com
Vc www.mywealthguide.com
Vc www.fpsb.co.in
Vc www.investopedia.com
Vc www.moneycontrol.com

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A

n partial fulfilment of the requirements of the Summer

Under the guidance of

èGoal Based Financial Planning´

4 - nvestment and ccumulation Goals:

 : Gather data.

 : nalyse the data.

 : ^reate a plan.

 : mplement your plan.

 : onitor your plan.

his involves keeping an eye on the performance of your investments, periodically

 Find out the cost of achieving these goals today.

 Start investing today, specifically for these goals!

Sr. o. Goal

How much do these goals cost today?

Sr. o. Goal ^ost ow

Sr. o. Goal ^ost ow ears From ow

Using this formula, we arrive at the following figures:

he rate of return would depend largely on the type of investment.

For our goals, we arrive at the following figures:

Sr. Goal ^ost ow ears ^ost ate of mt eeded

 l c tc c c iti

Vc Expected rate of inflation

   6: ^ SG  

   7:  B     F S  

5.3  SS ^?

×c Bonds (fixed-income investment): represent loans to a business or government,

Risk-Return Comparison of various nvestment Avenues

ype of nvestments Historical Returns Risk Level

×c Fixed Vs. Flexible Asset Allocation

×c Strategic Asset Allocation

×c actical Asset Allocation

G. Fixed s. Flexible sset llocation:

×c A fixed ratio of asset allocation means that balance is maintained by liquidating a

2. Strategic sset llocation

×c t classifies investors in terms of their lifecycle phases.

×c rhile older investor take a more conservative approach.

3. actical sset llocation

×c Despite the difficulty of forecasting people do it and fund managers themselves

×c But clearly there is no guarantee.

 am 44 years and working in a private company. My net earnings amount to Rs 42,000 a

My monthly household expense is Rs 15,000.  have monthly commitments of Rs 8,254

 have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my

Please suggest a saving plan taking these factors into consideration.

s my life cover of Rs 10 lakh adequate or do  need to increase the cover?

-c Shabbir Patawala (Mumbai)

Retirement planning is often overlooked. Most individuals tend to give attention to it

As a backup, your maturity proceeds of other insurance plans need to be redeployed in an

4 c tc c cti lcli

3l c c c  c c R c $c l  c c

he present value of Rs 15 lakh is likely to be Rs 33 lakh in 14 year. Your surplus of Rs

-c Mr. Husain Shaikh

 c tc  ii

^urrent nvestment Status:

Assumption: All incomes are net of tax

Basic Financial Planning:

o take care of eventualities, we suggest keeping a fund of Rs 500,000. He is adequately

Buying home worth Rs 1 crore/prepayment of home loans ² Rs 30 lakh in 2015:

^hild G (inflation-adjusted s 20 lakh in 20G5)

^hild 2 (inflation-adjusted s 28.5 lakh in 202G)

rhile considering prepayment of debt, Jaiprakash needs to prioritise on repaying the

Basic Financial Planning:

Funding the new venture:

n partial fulfilment of the requirements of the Summer

: Gather data.

: nalyse the data.

: ^reate a plan.

: mplement your plan.

: onitor your plan.

his involves keeping an eye on the performance of your investments, periodically

Find out the cost of achieving these goals today.

Start investing today, specifically for these goals!

Sr. o. Goal

Sr. o. Goal ^ost ow

Sr. o. Goal ^ost ow ears From ow

he rate of return would depend largely on the type of investment.

Sr. Goal ^ost ow ears ^ost ate of mt eeded

lc tc c c iti

6: ^ SG

7: B F S

5.3 SS ^?

Risk-Return Comparison of various nvestment Avenues

ype of nvestments Historical Returns Risk Level

×c actical Asset Allocation

G. Fixed s. Flexible sset llocation:

×c t classifies investors in terms of their lifecycle phases.

am 44 years and working in a private company. My net earnings amount to Rs 42,000 a

My monthly household expense is Rs 15,000. have monthly commitments of Rs 8,254

have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my

s my life cover of Rs 10 lakh adequate or do need to increase the cover?

4 c tcc ctilcli

3lc c c c c Rc $c l c c

he present value of Rs 15 lakh is likely to be Rs 33 lakh in 14 year. Your surplus of Rs

c tc ii

o take care of eventualities, we suggest keeping a fund of Rs 500,000. He is adequately

ife¶s 80^ nvestment:

Goal riented Planning: